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What Dewey do now?

29 May 2015 By Reynolds Holding

The Dewey & LeBoeuf trial that kicked off this week is putting legal eagles on a precarious perch. Three of the defunct U.S. law firm’s leaders face criminal charges of accounting fraud. Their methods may have been extreme, but plenty of legal shops play fast and loose with already fuzzy bean-counting rules.

The 1,300-attorney firm was the largest ever to declare U.S. bankruptcy. It may also be the first to have its finances scrutinized publicly in court. Dewey’s former chairman, executive director and chief financial officer all stand accused of ordering the use of accounting tricks to fool lenders and investors into propping up the firm. The trio says any adjustments they approved were within the rules and intended merely to keep the law practice humming.

The case could reverberate throughout the legal community. Backdating checks, counting partner contributions as revenue and other alleged shenanigans may cross the line, but they also don’t stray far from typical number-crunching methodologies.

Most firms keep books on a modified cash basis, allowing them to match billed – but not necessarily collected – fees with current costs, ostensibly to create a clearer picture of the business. Few rules govern the approach, which leaves plenty of room for abuse.

Attorneys who spend big on a case but won’t be paid until the following year, for example, may reasonably bill and count the revenue as income in the current year. Booking it now and postponing the costs, however, would look suspicious. The test is whether the move is intended to make financial reports more accurate.

Many firms fall short, fiddling with recruiting fees, equipment depreciation, partner distributions and the like to enhance reported profit, according to several law firm financial consultants. Those practices rarely come to light, but they probably contributed to the demise of mega-firms Howrey, Heller Ehrman and Brobeck, Phleger & Harrison.

The Dewey trial offers a rare glimpse into what is and isn’t allowed. How, for example, did the firm manage to report $985 million in 2011 revenue to the American Lawyer magazine and $785 million to its partners? Inquiring legal minds want to know. The answer may be that what’s now considered creative is actually illegal.

 

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